For 25 years there has been a steady drumbeat predicting the demise of the banking industry. Indeed, the industry has been, and will continue to be, reshaped by demographic, competitive, and structural forces.
Yet the industry has been reporting record profits, and there is credible research that questions the degree to which banks' market shares have actually eroded. Certain data suggest that banks have retained a much higher percentage of financial activity than previously thought because a considerable amount has shifted to off-balance-sheet categories.
To those charged with making an institution's strategic calls, this is the conceptual backdrop for choosing among strategic alternatives, for deciding to make (or not make) large investments in technology, products, and processes.
Based on my reading of the last two decades, bank CEOs have done a remarkable job of intuitively and deliberately navigating their banks through uncharted waters. Those who rushed headlong into a popular trend (LDC loans, commercial real estate, home banking) more often than not encountered significant difficulties or failed to realize a market return on the investments.
Given the rate of change, the demands of shareholders, and the revolution in technology, can the proven, careful, thoughtful approach continue to be effective?
The answer lies in assessing two critical drivers of bank performance: customer expectations and the ability of technology to alter products fundamentally.
With respect to customer expectations, there are multiple customer segments to be considered. Large corporations with knowledge of the latest financing methodologies are certainly going to want their banks to offer such products. The growth of derivatives is a case in point. In some areas of trust, credit cards, mortgage banking, and management of a bank's own portfolio, the same dynamic comes into play.
The circumstances are far different in the retail, small-business, and middle markets, where most banks get a majority of their deposits and profits. Consumers are not subject to financial fads, as they may be to clothing or automobile designs. To be too far ahead of the consumer may engender distrust.
True, technology advances can offer a potential competitive advantage, especially by reducing cost in a business like global securities processing that is dependent on economies of scale. Even in these cases, however, there is no rush to release the next version for fear a competitor will reach the market first and steal customers.
Another, perhaps vastly more important, factor is the enormous amount of customer trust and goodwill that banks enjoy. Despite the efforts of nonbank financial customers to attract small businesses, only 10% of those customers take a second round of financing from the nonbanks. They want to expand their commercial banking relationships as soon as they can.
The banking industry can, of course, squander this advantage over time, but a CEO would be unwise to risk it on some sort of futuristic scheme.
So it seems that the cautious approach historically taken by most CEOs has served the industry well. To abandon that mind-set in the face of the current challenges strikes me as folly.
But I also believe that the range of service alternatives that is emerging, along with probable shifts in consumer behavior, calls for a bit more of an orientation to action.
The actions must be carefully selected and timed, but they are central to keeping the investor community positively disposed toward a bank. Institutions that are not seen as responding in some fashion to potential new services and technologies will surely pay a price in terms of stock value.
Many of the products and markets that might develop in coming years require a significant knowledge base, either in terms of a technology such as the Internet, or in terms of multifaceted markets like small business. An organization that allows itself to fall too far behind the knowledge curve will find it virtually impossible to regain lost ground.
An example of the knowledge phenomenon can be found in mergers and acquisitions. Banks that have become expert in absorbing acquisitions are able to pay a higher price because they can set more ambitious cost- reduction and cross-selling goals. Others then find it difficult to close the gap.
What should a CEO do to deal with this sea of change intelligently and deliberately?
The first step involves what I call "event horizoning." This is a method for identifying the key issues, both customer-oriented and technology- related, likely to have an impact on the institution in coming years. These issues are then evaluated to isolate the driving variables that will affect the rate at which they will be adopted.
Based on the conclusions from that step, the bank will choose areas for testing and for well-crafted initiatives. But here there is a subtle but crucial distinction to be made. If an initiative is taken only because it is the topic du jour, then it is inappropriate and a waste of resources, and is likely to be seen as such by outside analysts.
The motivation for the actions should flow from the fact that they will move the bank up the learning curve in areas central to the bank's strategy and markets.
How selected events might figure into a bank's planning process, and topics that should (or should not) be on the CEO's short list of concerns, will be the subjects of future articles.
Unlike Bill Gates, I don't believe banks are dinosaurs. But in the next wave of change they surely face a dramatic expansion of technology-based services.
They remain a central element in the underpinning of the economy and are surprisingly adept at moving forward in concert with broad customer and market changes. For now, refining that process and staying the course strike me as the best strategy for building shareholder value.
Mr. Lewin, a former banker, consultant, and Bank Administration Institute executive, was recently named global marketing manager for chip cards at Verifone Inc., Redwood City, Calif. Subsequent articles will appear occasionally.